Taxing the Rich

My new column for the FT looks again at the battle over the budget and argues that Obama and the Democrats are right that tax revenues need to rise, but wrong to focus so tightly on top marginal income-tax rates. I think the Democrats' heavy emphasis on this makes little sense in economic terms--the wealthiest Americans would be relatively unaffected by a higher tax rate on employment income--and I bet the political benefits are at least somewhat overstated.

Most of the electorate may approve of higher taxes on the rich - along with other measures. But they will notice if Democrats have nothing else to suggest; and they will worry if they think Democrats see heavier taxes on the rich, and possibly not-so-rich, as an end in itself. Mr Obama tries to avoid giving that impression, but his allies in Congress, who swoon every time he says "millionaires and billionaires", do not.

It worsens the problem that the president's line between the middle class (whose taxes he has promised not to raise) and what one Democratic party spokesman recently called the ultra-rich is a household income of $250,000. The figure is too low. True, less than 3 per cent of households make that much at any one time - but a police officer married to a civil servant could sneak into this category. Income varies during one's lifetime, so a far larger number have crossed the line, or will do, or hope to, during their peak earning years.

From an economic point of view, broadening the base and raising more revenue from a wider segment of the population would be better. (This could and should be done in a way that made average, as opposed to marginal, tax rates more progressive than now, even as it brought high marginal rates down.)

In terms of the politics, a center-left party advocating higher taxes on "the rich" ought to define that term a bit more narrowly, I'd say. And it would also be wise to express (even if it has to fake it) reluctance to put taxes up for anyone. "We are doing this because it is necessary, not because we want to, and not because the rich have it coming." To imply otherwise may alarm the top end of the middle class, and anybody who aspires to join it. In the US, where people strive to get on, this could be a big mistake.  

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